A Second Quarter Surprise?

All my hopes and expectations, looking for an explanation
Have I found my destination? I just can't take no more
-Iron Maiden

Typically, we look forward to a new year and all it may bring.
However, considering the markets and the economy, it feels as
though many investors are already writing off 2009 as a lost cause.

The first obstacle in the way of recovery - improving the lack of
confidence among market participants - is proving to be much more
difficult to navigate than in prior recessions. The government
support programs (mostly four-letter configurations) are designed
to encourage investors to invest and consumers to consume.
Eventually, confidence will return, but zero percent Treasury
yields and the dismal holiday season are solid evidence that we are
still traveling into the tunnel as opposed to coming out.

Everyone, it seems, is of this same opinion to varying degrees.
Some investors, for example, only want Treasury risk, while others
are happy with corporate risk - though with significantly increased
restrictions.

However, by setting the lowest of expectations we increase the
probability of an upside surprise. Thinking back to school days,
there were plenty of students happy with "B" grades because at some
point in their academic development, they became convinced a "B"
represented their best expectations. Today, we seem to be hoping
for a "D+" in 2009.

These undercut expectations could actually lead to a significant
boost in confidence among market participants, allowing a base for
growth to build during the year and increasing our expectations for
2010.

For example, later this week we will get December's change in
nonfarm payroll figures which are expected to come in at minus
500,000 - meaning half a million people lost their jobs last month.
Should that figure come in significantly lower at, say, 200,000,
the markets would react strongly, taking this as a message that
perhaps things aren't as bad as we believe. Of course, there will
be 200,000 people who feel differently.

A more likely scenario is for a "lessening of negative news" to
occur perhaps in the second quarter. It's quite possible to
experience strong and sustained rallies in the second quarter
should we experience less negativity than expected. But this will
only happen if the economy can consistently perform better than
expectations over an extended period of time.

Though I believe the economy will not recover to solid three-plus
percent quarterly growth rates until at least mid 2010, it is
certainly possible for the equity and bond markets to show great
strength before then. All we have to do is exceed expectations and
in 2009 it feels like the deck is stacked in our favor.

All my hopes and expectations, looking for an explanation Have I found my destination? I just can't take no more -Iron Maiden

Typically, we look forward to a new year and all it may bring.However, considering the markets and the economy, it feels asthough many investors are already writing off 2009 as a lost cause.

The first obstacle in the way of recovery - improving the lack ofconfidence among market participants - is proving to be much moredifficult to navigate than in prior recessions. The governmentsupport programs (mostly four-letter configurations) are designedto encourage investors to invest and consumers to consume.Eventually, confidence will return, but zero percent Treasuryyields and the dismal holiday season are solid evidence that we arestill traveling into the tunnel as opposed to coming out.

Everyone, it seems, is of this same opinion to varying degrees.Some investors, for example, only want Treasury risk, while othersare happy with corporate risk - though with significantly increasedrestrictions.

However, by setting the lowest of expectations we increase theprobability of an upside surprise. Thinking back to school...Read More